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VAT – The Basics

In a rolling 12 month period, if a business makes over £85,000 worth of taxable supplies (sales of goods or services), it is legally obliged to register for Value Added Tax (VAT). The business must then charge VAT on its future taxable supplies and submit returns to HMRC.

It is also possible to voluntarily register for VAT, which can be beneficial in some cases.

What is a VAT return?

Put simply, a VAT return is a tax form specifically used to declare how much VAT is due to be paid or reclaimed from HMRC for a given period. VAT returns show

the total sales and purchases for the specified period,

how much VAT is owed on the sales (Output VAT), and

how much VAT to reclaim from purchases (Input VAT).

Even when there is no VAT to pay or reclaim for that period, there will still be a requirement to submit a return.

When do I file my VAT return?

VAT accounting periods can either be monthly, quarterly or annually. At the end of each VAT period, a return is prepared and usually needs to be received by HMRC within 5 weeks of the period end.

Once registered for VAT, you can set up an online VAT account which enables you to submit returns and check the filing and payment dates.

The VAT return and payment must be received by HMRC by the due date, so you should check how long it takes for your preferred payment method to clear in their bank account. For example, if you choose to pay by direct debit, make sure the money is in your account to transfer five days before collection date as this is how long it takes to process a first-time direct debit procedure.

How do I calculate my VAT returns?

The VAT bill you pay equates to the amount of VAT due on sales (Output VAT) minus the amount of VAT you’re liable to claim on what you’ve purchased (Input VAT).

If the amount you reclaim turns out to be higher than the amount due, you’ll get a VAT refund from HMRC.

How do I do my VAT return?

VAT returns must be submitted electronically. A Government Gateway account is required and this can be setup once VAT registration has been accepted. Currently the VAT return can be entered online through the HMRC website.

The Government remains committed to the roll out of Making Tax Digital (MTD) which is scheduled to take effect from April 2019. This means that it will be a requirement for most VAT registered businesses to report VAT returns digitally thereafter. ‘Digital’ excludes manual books, records and spreadsheets and so it will be necessary to use a designated software package to prepare and submit VAT returns to HMRC.

Rates of VAT and what you can claim VAT back on

There are different rates of VAT. Standard rate VAT is charged at 20%, reduced rate is 5%, and Zero rate is 0%. There can also be supplies which are exempt or outside the scope of VAT altogether.

In order to reclaim input VAT, all purchase invoices must be addressed to the VAT registered entity as detailed on the VAT registration certificate.

Not all purchases qualify for reclaiming input VAT. For example, VAT is not normally reclaimable on the purchase of a car and is never allowable for non-business expenditure.

There can be significant potential penalties for incorrect VAT returns. For an undeclared error, you could expect to pay a 15% surcharge.

Flat Rate VAT scheme

If your turnover is £150,000 or less, excluding VAT, you can apply for the Flat Rate scheme. With this in place, VAT liabilities are calculated at a fixed rate depending on the nature of the trade. This can be an advantageous scheme as it can greatly reduce the administrative burden of VAT accounting.

However, under the Flat Rate Scheme it is only possible to reclaim input VAT on capital expenditure exceeding £2,000 (including VAT).

For example if the VAT flat rate was 10%, on an invoice of £120 (£100 + VAT) the VAT liability payable to HMRC would be £12, leaving a balance of £108. As mentioned above, no further deduction is available for input VAT suffered on everyday running costs.

Please bear in mind that where a business spends very little in the course of its trading, the new limited cost trade rules may apply, resulting in a VAT flat rate of 16.5%.

Accrual Basis vs Cash Basis

Accrual Basis – VAT accounting on the accrual basis requires a business to declare all output VAT on invoices which have been raised during the VAT period. This is regardless of whether the invoice has been paid or not by the customer. This can leave businesses at a cash disadvantage as VAT may need to be paid over to HMRC before it has been received.

On the other hand it does enable the business to reclaim VAT on any purchases dated within the VAT period, again even where the suppliers have not been paid.

Cash Basis – VAT accounting on the cash basis only requires a business to declare output VAT on invoices that have been paid by customers during the VAT period. Thus avoiding the potential cashflow disadvantage described above.

Similarly input VAT may only be reclaimed where the invoice was paid during the VAT period.

Businesses are eligible to use the cash accounting scheme only if VAT turnover is less than £1.35M per year.